By GARRY RAYNO, Distant Dome
Last week electric deregulation grabbed headlines with the release of a state Supreme Court decision overturning a Public Utilities Commission decision.
The PUC’s October 2016 decision prevented Eversource from entering a 20-year agreement with Algonquin Gas that would have expanded an existing natural gas pipeline through the Access Northeast project.
The PUC said the proposal violated the state’s electric deregulation statutes, but the court disagreed.
The major sticking point was whether the first principle of electric deregulation is the separation of generation from distribution and transmission. The PUC said yes, but Chief Justice Robert Lynn said no in the 3-1 decision.
People have short memories is an adage often heard in political circles, but it should not be shortchanged.
In order to understand what drove electric deregulation, a review of what was happening at the time is necessary.
Before deregulation, electric utilities were integrated companies which means they owned the generating plants that produced the power that they distributed to their industrial, commercial and residential customers.
At the time, the utilities were collecting on average 10 to 14 percent rate of return on investment for their capital projects such as generating facilities or transmission infrastructure. The costs went straight into the rate base and if a company made an unwise investment it was no big deal because ratepayers would still have to pay for it.
New Hampshire had another large problem – the construction of the Seabrook Station nuclear power plant. Under the old structure, Public Service of New Hampshire was essentially using ratepayers as its financiers.
Lawmakers stopped the practice under the Construction Work in Progress law which forbid charging ratepayers for Seabrook until it generated electricity.
That meant Public Service had to go to the bond market to finance the project and we all know what happened next, the company went bankrupt as did two other utility investors, New Hampshire Electric Cooperative and Eastern Maine Electric Cooperative, while a fourth utility — Vermont Electric Cooperative — would have faced a similar fate had it not pulled out of the project two years before Public Service declared bankruptcy in 1988.
To take Public Service out of bankruptcy, Connecticut-based Northeast Utilities received guaranteed 4.5 percent rate increases for seven years.
Within five years, New Hampshire had the highest electric rates in the continental United States. Only Hawaii had higher prices.
The state also was slow to come out of the late ‘80s early ‘90s recession, and high electric rates were significantly hindering the state’s economic recovery.
With that backdrop New Hampshire was ripe for electric deregulation, a movement driven largely by big industrial and commercial users that swept areas of the country in the 1990s that had high electric rates like New Hampshire and the Northeast, Midwest and California.
In the mid-to-late 1990s, deregulation and the Claremont education lawsuit took turns grabbing headlines in New Hampshire, not really but it should have.
Utilities were not in love with the concept, but were willing to consider it if they were able to recover all of their stranded costs, a term that glazed eyes at the time. People soon learned it meant the utilities wanted to be repaid for all of their investments, including those that were no longer economical or you could say unwise.
New Hampshire lawmakers and business leaders were well aware of what happened with Seabrook and the outcome.
Although lawmakers tried to protect ratepayers by instituting CWIP, ratepayers paid for the facility anyway through the seven years of rate increases.
With the backing of the industry leaders like Cabletron co-founder former Republican Gov. Craig Benson, the push was on to bring deregulation to New Hampshire.
The thinking behind deregulation was to make the electric industry more like a private business and less like a protected monopoly.
The idea was to separate generation from the transmission and distribution operation which operate better as a monopoly.
By making generation separate, those who owned facilities would have to compete for customers, driving prices down and moving the profits into the four to six percent range most businesses operate under not 10 to 14 percent.
Competition in the distribution and transmission sector would be a disaster because building the infrastructure is so costly and having three or four duplicate systems competing would not lower rates but drive them up.
Several of deregulation’s key legislative drivers took to the House floor saying if the state passed deregulation, ratepayers would no longer carry the risk of new generating facilities, it would fall on the developers’ stockholders.
The belief was that only economically feasible generating facilities would be built and there would be no future stranded costs.
Customers would no longer have to buy their power from their utility and instead could buy from the cheapest provider. To help establish a competitive market, utilities were required to divest their generating facilities and their long-term purchase power agreements.
Lawmakers approved deregulation in 1996 and the PUC finalized a plan the next year.
Granite State Electric was the first utility to reach agreement with the state and offered electric choice to customers in 1998. Unitil was the last to reach agreement in 2003.
Public Service reached agreement in 2001, but a final agreement was delayed as the deregulated electric market in California began to fall apart as Texas-based Enron controlled much of the generation and moved power around to maximize profits but left rolling blackouts in its wake.
New Hampshire said wait a minute and allowed Public Service, which has about 70 percent of all electric customers in the state, to retain its generating facilities including Merrimack Station in Bow, Newington Station and Schiller Station in Portsmouth, as well as hydro facilities across the state and several smaller, but seldom used generation jets. Those plants were sold earlier this year.
When deregulation went into effect, large commercial and industrial users were quick to jump into the market, but small businesses and residential customers were slow to see the benefits, although they have begun to in recent years.
Adjustments have been made to the law here and there, but the bedrock of the plan has always been separating generation from the distribution of the electricity.
Without that separation, deregulation does not exist and there is no free market for competitive electric prices.
Deregulation has subjected consumers to more of the volatility in the electric market but allows the “educated consumers” to benefit significantly over the old integrated system.
Last week’s Supreme Court said the PUC erred when it said the fundamental principle of restructuring is to separate generation from distribution and transmission.
The Supreme Court said the law does not elevate separation above the other principles and insisted reducing electric rates was the primary consideration which allows flexibility with projects like Access Northeast.
The decision was not unanimous as Senior Associate Justice Gary Hicks said, “the majority misses the forest for the trees.”
And he said the decision would “undermine the main objectives of the act and re-expose ratepayers to the types of financial risks from which the Legislature sought to protect them.”
The final say on the restructuring law has yet to be written as lawmakers may well decide they need to step in and make clear what the priority should be.
That is likely to ignite a debate in the legislature that will take more than a single session to decide, much like the original law.
Garry Rayno may be reached at email@example.com
Distant Dome by veteran journalist Garry Rayno explores a broader perspective on the State House and state happenings. Over his three-decade career, Rayno covered the NH State House for the New Hampshire Union Leader and Foster’s Daily Democrat. During his career, his coverage spanned the news spectrum, from local planning, school and select boards, to national issues such as electric industry deregulation and Presidential primaries. Rayno lives with his wife Carolyn in New London.